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[Economic Survey Ch6] Balance of Payments, Forex

Reserves, Currency Exchange, NEER, REER

1. What is Balance of Payment?

2. Why BoP = 0 in theory?

3. Convertibility

4. Rupee-Dollar Exchange rate

5. Building up Foreign Exchange Reserves

6. FOREIGN EXCHANGE RESERVES

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7. FOREX Reserve: India vs other

8. Why volatility in rupee?

9. How did rupee recover?

10. Exchange Rate of Other Emerging

Economies

11. NEER and REER

12. Why is REER important?

13. External Debt

14. FDI Restrictiveness Index (FRI)

15. FDI: defense offset

16. CHALLENGES AND OUTLOOK

17. Mock Question

What is Balance of Payment?

If you want to see a company’s incoming and outgoing cash, you’ve to check its account

book.

Similarly Balance of Payment (BoP) is the summary / account sheet that shows the cash

flow between India and rest of the world.

BoP is made up of two parts: Current account and capital account. (As per IMF definition,

three parts: Current Account + Capital account+ financial account).

Without getting into technical details, just a brief over view:

Balance of Payment

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Current Account Capital (and financial)

Account

1. Import, Export (always negative, because we export less

and import more oil n gold, hence we’ve trade deficit.)

2. Income from abroad (interest, dividends paid on Indian

investor’s FDI, FII in USA etc.)

3. Transfer (gift, remittances from NRI to their families etc.

always positive for India because of large Diaspora

abroad.)

1. Foreign investment in India (FDI, FII,

ADR, direct purchase of land,

assets).

2. External commercial borrowing,

external assistance etc.

Note: current account can be calculated using “Visible and invisibles”, that was explained

in old article on current account deficit click me.

Since we want to track the flow of cash, so, whenever American invest in India (via FDI,

FII, ADR etc) we add it as (+), and

when Indians invest in USA (via FDI, FII, IDR etc.) we add it as (-) and then get the final

figure for Foreign investment.

Same goes for everything in balance of payment (remittances, External commercial

borrowing whatever.)

In short, BoP= we are tracking the incoming and outgoing money.

For India, current account has been in deficit (negative number) and capital account has

been in surplus (positive number).

The BoP accounting system is similar to double entry book-keeping.

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Therefore theoretically, balance in current account and balance in capital account should

be same (ignoring the +/- signs).

In other words, if there is deficit in current account, there has to be equal surplus in capital

account. Why?

Why BoP = 0 in theory?

Assume there are only two countries India (rupees) and USA (dollars). And there are no

forex agents or middlemen, taxation, regulation, cricketers, politicians, saah-bahu serials

nothing…

Now Indian importer buys Apple6 phones worth 10 billion US$ from American exporter.

Since there is no forex agent, the Indian importer will pay 500 billion Indian rupees to that

American exporter. (assuming 1$=50 Rs.) Means that much Rupee currency is “gone”

from Indian system via current account.

But that American exporter has no use of Indian rupees! He lives in USA, he cannot even

buy a burger from local McDonalds shop using Indian rupees. So what can he do?

1. He can import something else from India (e.g. raw material, steel and plastic for further

production of Apple6) = our rupee currency comes back to India via current account.

2. He can “invest” that Indian currency to setup some factory or joint venture in India

(=our rupee currency comes back to India via capital account)

3. He can buy some shares or bonds in India. Again our rupee currency comes back.

4. He can find a 2nd American who wants to import something from India / wants to invest

in India. Apple6 guy can sell his rupee currency to that third American fellow

@Rs.50=1$ or Rs.49=1$ or Rs.99=1$ (depending on the desperation of that 2nd

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American fellow).

In short, if rupee goes out, it has to come back. (same for dollar, from American point of

view).

Therefore, current account + capital account = ZERO (balance of Payment), atleast in

theory.

But in reality, RBI or tax authorities never have complete details of all financial transactions

and currency exchange rates keep fluctuating. Hence there will be statistical

discrepancies, errors and omissions and. So, BoP is expressed as:

Current Account + Capital account + Net errors and omissions = 0 (Balance of Payment).

In IMF definition, we can express this as

Current Account + Capital account + Financial account + balancing item = 0

Ok then does it mean a country can never have surplus (or deficit) in Balance of payment?

Well, a country can have “TEMPORARY” surplus or deficit in BoP. Because, BoP is

calculated on quarterly and yearly basis. There is a good chance, that American Apple6

exporter may not invest back all those 500 billion Indian rupees in India within that time-

frame.

Secondly, Indian Government may put some FDI/FII restrictions so Apple6 exporter (or that

third American guy) cannot re-invest in India even if he wants to.

But in the long run, system will balance itself. for example

Apple exporter will find some fourth American importer and convince him to pay Indian

exporter in rupee currency and thus apple guy will get rid of his 500 billion Rupees by

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exchanging it with that American importer’s dollar

Or the apple exporter will find some NRI living in USA. This NRI wants to send money

(dollar earned by working in USA) to his family back in India, (preferably in Indian

currency ) so this NRI will be willing to exchange his dollar savings with that Apple

exporter’s rupees.

There are many other possibilities and combinations – but the point is, in BoP,

whatever currency goes out of the country, will come back to the country.

Convertibility

Suppose you want to import a dell computer from USA. And American exporter accepts

only payments dollars.

If you can easily convert your rupee into dollars, that means Rupee is fully convertible. And

rupee is fully convertible as far as Current account transactions are concerned (e.g.

import, export, interest, dividends).

But rupee is partially convertible for capital account transection. (In crude terms it means, if

an Indian wants to buy assets abroad or invest via FDI/FII OR borrow via External

commericial borrowing (ECB) he cannot do it beyond the limits prescribed by RBI. (And

vice versa e.g. American wants to convert his dollars to rupees to invest in India, then also

RBI’s limits have to be followed).

RBI gets power to do t̂his, via FERA and FEMA Acts.

1973: Foreign Exchange Regulations Act, 1973 (FERA).

1997: Tarapore Committee (of RBI), had recommended that India should have full capital

account convertibility. (Meaning anyone should be allowed to freely move from local

currency into foreign currency and back, without any restrictions by Government or RBI.)

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2002: Government replaced FERA with Foreign Exchange Management Act (FEMA).

Although full capital account convertibility is yet not given.

Full capital account convertibility has both pros and cons. But that’d require another

article. Let’s get back to the topic, we are seeing the 6th chapter of Economic Survey:

Balance of Payment, exchange rates etc.

Rupee-Dollar Exchange rate

How does Fixed Exchange Rate system work? and how does market based exchange

rate system work? = explained in the Bretton woods article. Click me

Anyways, let’s construct a bogus technically incorrect model to understand the market

based exchange rate system, once again:

Assume following things

There are only two countries in the world India and America.

India has rupee currency. Indian farmers don’t grow Onions.

America doesn’t have any currency, they trade using onions. The rate being 1kg

onion=Rs.50

First situation: American investor thinks that Indian economy is rising. If we invest in India

(FDI/FII), we’ll make good profit. So they’re more eager to convert their onions to Indian

rupee currency. So they’d even agree to sell 1kg onions =Rs.45. (and then buy Indian

shares/bonds worth Rs.45)

Result =Rupee strengthened against onion (dollar).

During this time, RBI governor also buys 300 billion kilo onions from the forex and stores

these onions in his refrigerator. (Why? Because onions are selling cheap! And why onions

5/6/2014 [Economic Survey Ch6] Balance of Payments, Forex Reserves, Currency Exchange, NEER, REER - Mrunal

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are selling cheap? Because there is “surge” in capital investment in India by American

investors.)

Ok everything is going nice and smooth. Now add third country to our bogus model: UAE.

Second situation: UAE has increased crude oil prices, and they don’t accept rupee

currency. They also want payment in onions.

1 barrel of crude oil costs 132kg of Onions.

India is eager/desperate for oil, because if we don’t have crude oil, we can’t get petrol,

diesel= whole economy will collapse.

So India would agree to buy 1kg onion even for Rs.55 (from American or forex agent or

whoever is willing to sell his onions). Then India can give that onions to some Sheikh of

UAE and import crude oil.

Third situation: The Sheikh of UAE gets even greedier, he demands 200kg onions for 1

barrel of crude oil. Now 1kg onion sells for Rs.59, Because those with onion surplus

(vendors) know that India likes it or not, it’ll have to buy onions to pay for the crude oil!

Thus, Rupee has weakened against onion (Dollar.)

If such situation continues, then there will be huge inflation in India (because crude oil

expensive=petrol/diesel expensive = transport expensive= milk/vegetables and everything

else transported using petrol/diesel becomes expensive.)

Now RBI governor decides to become the hero and save the fall of rupee against onion.

So, He loads a few tonnes of onions in his truck and drive it to the forex market.

Result: onion supply has increased, price should go down.

Now onions get little cheaper: 1kg onion =53 Rs.

Thus RBI’s “intervention” in the forex market has led to “recovery” of rupee.

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Ok so what do we get from this story?

1. RBI’s intervention to buy Foreign exchange during surge in capital investment= leads to

build-up of (foreign exchange) reserves, which provides self-insurance against external

vulnerability of rupee.

2. When RBI sells its foreign exchange reserves, it stems (halts) the fall of rupee.

3. Higher foreign exchange reserve levels restore investor confidence and may lead to an

increase in foreign direct and indirect investment flows= boost in growth and helps bridge

the current account deficit.

Building up Foreign Exchange Reserves

Prior to 1991, India followed License-quota-inspector (and suitcase) raj and import

substitution strategy. (Beautifully explained class 11 NCERT textbook.)

During that era, foreign companies couldn’t invest in India.

Imported products such as radio / camera/ wristwatches attracted heavy custom duty. (And

that led to rise of smugglers and mafias, and the Bollywood movies that romanticized their

criminal lives.)

On the other hand, thanks to the license-quota-inspector (and suitcase) raj, the private

Indian companies weren’t big or efficient enough to compete in international market so

export was also low.

Result: during that time incoming money (via export, investment) was very low. Hence RBI

couldn’t build up huge forex reserve. (when onion supply is low, its prices will be high)

Ultimately in 1991, the Forex reverses of India were about to exhaust.

Finally India had to pledge its gold to IMF and get loans.

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Then India had to open up its economy for private and foreign sector investment. Remove

the license-quota-inspector raj etc. to boost the incoming flow of dollars and other foreign

currencies…..all those LPG reforms. (Although suitcase raj still continues, because the

Mohans in the system are blinded by totally awesome people like A.Raja.)

fast-forward: now we’ve a trillion dollar economy, our software and automobile companies

are globally recognized… blah blah blah.

But the lesson learnt: RBI should have good foreign exchange reserve.

Hence post LPG reforms, RBI has been buying dollars, pound yen etc. from the currency

market, whenever FII/FDI inflow is high. Because during such situation, the foreign

investors are more eager to get their dollars converted to rupee currency hence rupee is

trading at higher rate e.g. 1$=Rs.49

But after global financial crisis, RBI has stopped building forex reserves actively.

Nowadays RBI intervenes in the forex market, only to stop the excess volatility (fluctuation)

in rupee exchange rate.

However, there was a sharp decline in rupee in 2011-12. Then RBI had to sell foreign

exchange worth 20 billion dollars. (so demand of foreign currency would decrease and

rupee would stop).

Similarly in 2012 also RBI had to sell its foreign exchange reserve worth 3 billion dollars to

prevent the fall of rupee. (in June 2012, Rupee had became very weak: 1$=around 57

Rupees. Thanks to RBI and Government’s interventions, it came back to the normal 53-54

level at the end of 2012.)

FOREIGN EXCHANGE RESERVES

India’s foreign exchange reserves is made up of

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1. Foreign currency assets (FCA) (US dollar, euro, pound sterling, Canadian dollar,

Australian dollar and Japanese yen etc.)

2. gold,

3. special drawing rights (SDRs) of IMF

4. Reserve tranche position (RTP) in the International Monetary Fund (IMF)

The level of forex reserve is expressed in US dollars. Hence India’s forex reserve declines

when US dollar appreciates against major international currencies and vice versa.

RBI gains Foreign exchange reserves by

buying foreign currency (via intervention in the foreign exchange market

Funding from the International Bank for Reconstruction and Development (IBRD), Asian

Development Bank (ADB), International Development Association (IDA) etc.

aid receipts,

interest receipts

FOREX Reserve: India vs other

Country wide- China has the largest forex reserve (3300+ billion USD). India is 8th position

(close to 300 Billion USD).

Countries with largest Forex reserves

1. China

2. Japan

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3. Russia

4. Switzerland

5. Brazil

6. South Korea

7. Hong Kong

8. India

Why volatility in rupee?

Volatility = Variation in something over the given time.

if today SENSEX is 12000 points, tomorrow it goes up by 200 points and day after it goes

down by 300 points etc…..they we say “market is volatile”.

If morning shift’s SSC paper is too easy but evening shift’s SSC paper is too damn difficult

then we can say “SSC paper is volatile”.

Similarly, if there is too much fluctuation in Dollar to rupee exchange rate, we say “rupee is

volatile”.

In 2012, the rupee has experienced unusually high volatility. Why?

#1: import-export

Demand for Indian goods and services has declined due to Euro-zone crisis + America

hasn’t fully recovered.

On the other hand, cost of import= very high due to oil and heavy gold import (due to high

inflation).

Similarly high inflation = raw material / services become costly for the export. If he raises

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the prices, then his export product becomes less competitive than Cheap China made

stuff.

#2: FII

In the total foreign investment in India, majority comes from FII (and not from FDI).

FII money is “hot”, it leaves quickly whenever FII investors feels that India’s market is not

giving good returns and or some other xyz country’s market is giving better returns.

There are week-to-week variation in such FII inflows and outflows. Hence it leads to

changes in rupee-dollar exchange rate.

#3: Dollar is strengthened

US treasury bonds are consider the safest investment. During the peak of Eurozone,

Greece crisis, the big investors started pulling out money from Europe and investing it in

US treasury bonds. = demand of dollar increased. So other currencies would automatically

weaken against dollar.

#4: policy paralysis

For past few years, Indian Government was lazy regarding environmental project

clearances, land acquisition, FDI in retail, pension, insurance etc. that has led to foreign

investors losing faith in Indian economy= slowdown in FII inflows. (besides Government did

not allow more FDI in pension / insurance / retail etc. so FDI inflow did not increase either).

#5: Risk On / Risk off

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From the earlier article on debt vs equity, Government bonds = safer than equities

(shares). But when an investment is safe= it doesn’t offer good returns.

When foreign investors feel confident, they display “risk on” behavior =they invest more in

equities, particularly in developing countries. (which are risky but offer more profit).

But when foreign investors are not feeling confident, they display “risk off” behavior, = they

usually fall back to investing in US treasury bonds or gold.

In India, majority of foreign investment comes from FII (and not FDI)

and FII investors are more prone to displaying this risk-on/risk-off behavior.

They plug in their money quickly, they pull out their money quickly. Thus, Indian rupee’s

exchange rate becomes volatile against Dollar.

Therefore, Indian Government needs to inspire and sustain the confidence of foreign

investors, to prevent the fall of rupee. RBI intervention in forex market, cannot help beyond

a level.

How did rupee recover?

Rupee is weakening against dollar, it means demand of rupee is less than the demand for

dollars. So how did RBI and Government fix it?

RBI Govt.

During 2012, RBI sold around 3 billion dollars from its forex

reserves.

Oct-12, Rupee recovers, 1$=around 51 rupees.

Govt. allowed FIIs to invest

more money in govt.and

corporate bonds.

Govt. eased the FDI policy for

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RBI allowed Indian banks to give more interest on Foreign

Currency Non-Resident (FCNR) bank accounts. (thus attracting

more NRIs to save their dollars in Indian banks).

pension, insurance, aviation,

multi-brand retail etc.

Govt. offered subsidies and

tax benefits to exporters.

Exchange Rate of Other Emerging Economies

In 2012, Rupee wasnot the only currency that weakened against dollar.

The currencies of other emerging economies, such as Brazilian real, Argentina peso,

Russian rouble, and South Africa’s rand also depreciated against the US dollar.

It means dollars’ demand has increased. In the wake of sovereign debt crisis in the euro

zone and due to uncertain global economic environment, more and more investors are

preferring to buy US treasury bonds and other securities in USA.

NEER and REER

We keep reading bad headlines that rupee weakened against dollar…rupee all time low

against dollar…and so on.

Does it mean, Indian rupee is a really bogus weak and fragile currency? Nope.

Because we don’t trade only with USA.

We don’t trade only in terms of Rupee to Dollar exchange.

We also trade with many other countries in many other forms of currency.

Therefore, if we want to objectively measure Rupee’s volatility, we’ve to compare its price

fluctuations with multiple currencies (Euro, Yen, Pound etc.) and not just against single

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Dollar currency.

Secondly: 1$=Rs.50 or 1$=Rs.40 that alone doesn’t decide the demand of goods and

services between India and America. This demand also depends on the inflation (both in

India and in USA.)

NEER and REER index (calculated by RBI), help us here get a clear picture here.

First you’ve to calculate NEER. Then using NEERs, you calculate REER.

NEER REER

Nominal Effective Exchange Rate Real Effective Exchange Rate (REER)

The weighted average of bilateral nominal exchange rates of

the home currency in terms of foreign currencies.

weighted average of nominal

exchange rates, adjusted for

inflation.

Why is REER important?

REER captures inflation differentials between India and its major trading partners.

REER reflects the degree of external competitiveness of Indian products

REER captures movements in cross-currency exchange rates.

RBI calculates two REER indices:

REER-6 REER-36

Here Indian rupee is measured against 6 big currencies viz.

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1. Dollar

2. Hong Kong dollar

3. Euro

4. Pound sterling

5. Japanese Yen

6. Chinese Renminbi

As the name suggest, 36 currencies.

Now Indian rupees vs. other currencies (Dec. 2012 data)

Just for reference:

1 unit of foreign currency Worth Rs.

Indonesian Rupiah 0.006

S.Korean Won 0.05

Pakistan Rupee 0.56

Yen 0.65

Thailand Baht 1.78

Mexican Peso 4.25

Chinese Renminbi 8

Brazilian Real 26

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Turkish LIRA 30

US Dollar 54

Canadian Dollar 55

Euro 71

SDR of IMF 84

Pound 88

External Debt

World Bank has released ‘International Debt Statistics, 2013‘

It contains the debt numbers for the year 2011.

According to those statistics, in 2011 India was in fourth position in terms of absolute

external debt stock after China, the Russian Federation and Brazil.

At the end of March 2012, India’s external debt stock = 345 billion (near to 17 lakh crore

rupees.)

India’s external debt is high because of

Higher NRI deposits (since NRIs are not getting much return on their dollar savings in

American banks, they prefer to invest it in India).

External Commercial borrowings (by Indian corporates)

Corporate borrowers in India and other emerging economies are keen to borrow in foreign

currency (dollar and Euro). Because in US/EU right now the market is down, not many

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loan domestic taker businessmen, hence their banks/ investors don’t mind giving loans to

foreigners (that is Indian / other Asian businessmen) at very low interest rate and longer

EMIs.

But such borrowings however, are not always helpful, especially in times of high currency

volatility. For example, if Indian businessman had borrowed loans from USA when 1$=49

rupees but after some years, if 1$=57 rupee, then he’ll have to repay more. This will badly

affect not just him but to India’s BoP as well.

FDI Restrictiveness Index (FRI)

Prepared by OECD.

A score of 1 indicates a closed economy and 0 indicates openness.

China is ranked #1 (=it is the most restrictive country)

India is ranked fourth

Foreign Direct Investment (FDI) is preferred to the foreign portfolio investments primarily

because FDI is expected to bring modern technology, managerial practices and is long

term in nature investment.

The Government has liberalized FDI norms overtime. As a result, only a handful of

sensitive sectors now fall in the prohibited zone and FDI is allowed fully or partially in the

rest of the sectors.

FDI: defense offset

At present, 26% FDI is allowed in Indian defense sector. It also requires

FIPB approval

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licensing under Industries (Development & Regulation) Act, 1951

has to follow guidelines on FDI in production of arms & ammunition.

India needs to open up the defense production sector to get access and ensure transfer of

technology.

The existing FDI policy for defence sector provides for offsets policy. (meaning the foreign

company has to buy or outsource some of its work to local /domestic players. E.g. FDI in

multibrand retail, mandates that foreign company must buy 30 percent of the from small-

scale industries.)

Such offset policy soften the balance of payments impact and/or develop local technical

capability.

Recently Government revised the offsets policy for defense sector.

But still, it has shown no visible direct or indirect benefits h on the domestic Indian defence

industry.

CHALLENGES AND OUTLOOK

while capital inflows in India, were sufficient to finance the CAD safely.

But majority of the capital flows are via FII (hence volatile)= this has led to financial

fragility and is reflected in rupee exchange rate volatility.

We cannot significantly increase our exports in the short run because they are dependent

upon the recovery and growth of partner countries (US, EU). And this may take time.

Therefore our main focus has to be on curbing imports, mainly by making oil prices more

market determined (=expensive), and curbing imports of gold.

We should put greater emphasis on FDI including opening up sectors further.

Finally, external commercial borrowing needs to be monitored carefully.

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Misc. facts

Three top countries from where FDI comes to India: Mauritius, Singapore and UK

Global Economic Prospects= this report is published by world bank.

Mock Question

1. Which of the following, is not a part of Capital account

1. FDI

2. FII

3. Remittances

4. External commercial borrowing

2. Which of the following is not a part of Current account?

1. Import

2. Export

3. External commercial borrowing

4. Interest, dividends paid on FII

3. India has deficit in

1. Current account

2. Capital account

3. Both

4. None

4. India has surplus in

1. Current account

5/6/2014 [Economic Survey Ch6] Balance of Payments, Forex Reserves, Currency Exchange, NEER, REER - Mrunal

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2. Capital account

3. Both

4. None

5. India’s official forex reserve doesn’t include

1. Foreign currency assets (FCA) (US dollar, euro, pound sterling, Canadian dollar,

Australian dollar and Japanese yen etc.)

2. Gold

3. Silver

4. Special drawing rights (SDRs)

6. How can RBI build its foreign exchange reserve?

1. By Buying foreign currency

2. via funding from World Bank, ADB etc.

3. Both

4. None

7. Which of the following country has second largest forex reserves in the world?

1. India

2. France

3. Japan

4. USA

8. Among the countries with largest forex reserves, India ranks

1. second

2. third

3. fifth

4. eighth

5/6/2014 [Economic Survey Ch6] Balance of Payments, Forex Reserves, Currency Exchange, NEER, REER - Mrunal

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9. Rupee will strengthen against dollar when

1. Government eases FDI policy

2. Government raises the ceiling on FII investment

3. Both

4. None

10. Correct statement

1. NEER is calculated by RBI

2. REER is calculated by Finance ministry

3. both

4. none

11. REER captures

1. difference in inflation between India and its trading partners

2. external competitiveness of Indian products

3. Both

4. none

12. Which of the following currency is not part of REER-6 calculation?

1. Hong Kong Dollar

2. Japanese Yen

3. Pound Sterling

4. Canadian Dollar

13. Incorrect Match

1. S.Korea: won

2. Mexico: Peso

3. Argentina: Peso

5/6/2014 [Economic Survey Ch6] Balance of Payments, Forex Reserves, Currency Exchange, NEER, REER - Mrunal

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14. Which of the following is not released by World Bank?

1. International Debt Statistics, 2013

2. FDI Restrictiveness Index

3. Global Economic Prospects

4. All of Above

15. FDI Restrictiveness Index is released by

1. IMF

2. ADB

3. OECD

4. World Bank

16. Majority of FDI to India, comes from

1. Mauritius

2. Germany

3. USA

4. None of above

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Tags: Economic Survey 2012

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अब तक 97 कम��स �लखी गयी

[Economy] Current 2014 Feb Week 1: Fiscal Policy, Spectrum, Subsidies, LPG and

Banking Sector (Part 1 of 3)

[Economy] Current 2014 Feb Week 1: FDI, Regulatory Bodies, Infrastructure (Part 2 of 3)

bhai

Reply

Definition of ‘Nominal Effective Exchange Rate – NEER’

The unadjusted weighted average value of a country’s currency relative to all major currencies being traded

within an index or pool of currencies. The weights are determined by the importance a home country places on

all other currencies traded within the pool, as measured by the balance of trade.

bhai

Reply

Definition of ‘Real Effective Exchange Rate – REER’

The weighted average of a country’s currency relative to an index or basket of other major currencies adjusted

for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of

one country’s currency, with each other country within the index.

Don

Mrunal, like the way you write, you are like Chetan bhagat – full masala, Indian(desi) language explanation.

5/6/2014 [Economic Survey Ch6] Balance of Payments, Forex Reserves, Currency Exchange, NEER, REER - Mrunal

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Reply

Jokes apart, nice article.

DHANA

Reply

A-3,11,12,16

B-4,15

C-1,2,5,6,7,9,15

D- 8,14

Zulu

Reply

Invest

with the best!

Follow between 70,000 talented currency traders from 192 countries automatically, FOR FREE in your

account. http://notfor.zulutrade.com

ashif

Reply

During 2012, RBI sold around 3 billion dollars from its forex reserves.

Oct-12, Rupee recovers, 1$=around 51 rupee///how?

Shashank

Reply

RBI sold dollars, thus reducing the demand for dollars, in turn strengthening the rupee…the same

way like bring more onions to the market and its price falls!!

let me know if i m not correct..

Sachin

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Reply

RBI sold dollar to whom??how it is done in market?pls xplain

Sailesh

Reply

RBI sells Dollars in FOREX market to decrease demand of Dollars and hence

depreciating Dollar and appreciating Rupee

Shashank

Reply

Mrunal sir, how is it that well developed economies like Japan and S.Korea have their currencies weaker than

the Indian Rupee…like 1 Yen=0.65 and 1 S.Korean Won=0.05??

garima

Reply

mrunal sir,

indian economy by ramesh singh, page 15.6-

“there is no deficit or surplus in capital account like the current account”

while you say, ” if there is deficit in current account, there has to be equal surplus in capital account.”

plz clarify.

thanks

garima

Reply

also, if anyone can help me with this ques:

“if there is deficit in current account, there has to be equal surplus in capital account. Why?”

terminator

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Reply

@garima: BOP includes current account, capital account, forex reserves and errors and omissions.

so the deficit in current account is filled or made up by surplus in capital account and if there is still more left

after this it goes to forex reserves. and to answer why deficit needs to be equal to surplus in capital account.

deficit is overspending so it has to be financed from somewhere and this somewhere is surplus in capital

account. lets take an example suppose you spent rs 1000 on chocolates while you had only 600 with you then

your overspending is 400 so from somewhere these 400 needs to be financed..ie..by borrowing so it can be

400 or 500 or 600 or anything more than 400.this borrowing is current account and has to be atleast equal to

400. thats why ” if there is deficit in current account, there has to be equal surplus in capital account.”

hope this helps.

garima

Reply

got it… thanks..

but why is capital account always a surplus in case of india?

terminator

Reply

@garima: as you know that current account includes the liabilities to the government. it includes external

commercial borrowings, domestic borrowings, fdi, fii, nri deposits and remitances. As indian diaspora is large

and quite rich and also lately fdi and fii have shown interest in the indian economy this capital account

happens to be surplus.

garima

Reply

okk.. thanks

terminator

@garima: 1 correction it should be only nri deposits not deposits and remitances. Sorry.

5/6/2014 [Economic Survey Ch6] Balance of Payments, Forex Reserves, Currency Exchange, NEER, REER - Mrunal

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Reply

terminator

Reply

oops!! sorry read current as capital account.

Shri

Reply

Mrunal sir can we get all the economic survey chapters in single file ? it will be easier to study.. thanx

disa sarma

Reply

There are some interesting US and India related taxation questions and answers in the community section on

http://www.simplyglobal.com. Looks like some of them have been answered by CPAs from US and CAs from

India. I have used their daily exchange rate comparison for different banks/companies. I also like the graph on

their website that shows the trend of the exchange rate over the last year, as published by Reserve Bank of

India.

PRASHANT

Reply

MRUNAL SIR YOU GAVE THE EXAMPLE OF I PHONE FOR BALANCE OF PAYMENT.BUT I DIDN’T

UNDERSTAND ONE THING THAT WHY APPLE 6 EXPORTER WILL ACCEPT PAYMENT IN INR INSTEAD OF

DOLLARS??? PLZ RPLY??

Chara

Reply

the story here is an assumption.

abhishek

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« Older Comments

Reply

effect of balance of payment disequillibrium

rohit

Reply

1 c,2 c,3 a,4 b,5 c,6 b,7 c,8 d,9 b,10 a,11 c,12 d,13 b,14 b,15 c,16 c

chandramohan

Reply

good article

pooja

Reply

sir, i could not find the current account deficit page … its not available

Indian87

Reply

Sir,

This link is not opening..

http://mrunal.org/2012/05/economy-current-account-deficit-how-to.html

likewise, there are some other links also. Kindly suggest a solution.

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